Over the past six months, Gibraltar’s stock price fell to $49.10. Shareholders have lost 10.3% of their capital, which is disappointing considering the S&P 500 has climbed by 13%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Gibraltar, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Gibraltar Not Exciting?
Despite the more favorable entry price, we’re passing on Gibraltar for now. Here are three reasons why ROCK doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Gibraltar’s 3.8% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the industrials sector.
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Gibraltar’s weak 3% annual EPS growth over the last five years aligns with its revenue performance. On the bright side, this tells us its incremental sales were profitable.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Gibraltar’s $1.37 billion of debt exceeds the $15.15 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $225 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Gibraltar could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Gibraltar can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Gibraltar’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 11.4× forward P/E (or $49.10 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are more exciting stocks to buy at the moment. Let us point you toward a dominant aerospace business that has perfected its M&A strategy.
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